Four Types of Expense Fraud

What is expense fraud?

Expense fraud refers to the manipulation of expense claims – with employees overstating in some way, shape or form what they are claiming back. This allows employees to be reimbursed for money they never spent. It can be difficult to determine and a lot of the time fraudsters can simply mask it as ‘human error’.

Expense fraud has been labelled by the Association of Certified Fraud Examiners (ACFE) as 14% of all internal business fraud cases. However, what may be surprising is that this number jumps up to 20% in businesses with fewer than 100 staff, and even more shocking? It increases to 23% of cases in nonprofits. 

The underlying link between the two business sectors high proportions could be the lower implementation of anti-fraud systems. ACFE explained that this may be because these organisation types have less money to spend on management controls, aren’t as aware of organisational fraud, or simply have more trust for their employees. 

No matter the reason, or the size of the business – fraud can always find a way to sneak in. So, what are the main methods fraudsters use?

Four types of expense fraud

In a different ACFE report, the organisation identified four main types of expense fraud. These are as follows. 

Mischaracterised expenses.

Mischaracterised expenses are one of the most common types of expense fraud and refer to personal expenses that have been submitted as occupational expenses. This may look like an employee going on a work trip and claiming personal expenses that are not directly related to the work but are framed as so.

These may well be submitted without any ill intent from the employee – however, it is also one of the easiest ways to commit fraud. Problems can also arise when these expenses are continuously approved and the cost to the company accumulates. 

Overstated Expenses.

This type of occupational fraud is simply the inflation or exaggeration of valid business expenses. An employee may seek additional reimbursement by claiming for more than the actual expense was. 

This could look like an employee claiming for more petrol than they used while travelling for work, or claiming they stayed in a more expensive hotel room than they did on a business trip. The expense is real – however, the cost has been inflated. 

Multiple Reimbursements.

Similarly to overstated expenses, multiple reimbursements stem from legitimate businesses expenses. The difference here is that an employee takes the correct expense data, and submits it to claim for reimbursement multiple times.

If businesses are still manually processing expense claims, this type of expense fraud can go easily unnoticed.

Fictitious expenses.

Sometimes an employee may go one step beyond manipulating legitimate receipts, like the methods above, and instead create an entirely fake expense. These false expenses can be constructed in a variety of ways, including:

• Generating receipts or invoices online: Software for creating receipts online is now easily accessible and provides extremely real looking counterfeit receipts.
• No receipts: Some companies may have loose policies around expensing that don’t require receipts, just proof of purchase. In these cases, fictitious expenses may be done by simply providing false credit transactions or cheques.